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Centre opposes states' two-rate GST structure
January, 27th 2010

Against the two-rate structure proposed by the empowered committee of state finance ministers for Goods and Services Tax (GST), the Centre has said that the new indirect tax structure should have a single rate as two rates would pose problems.

In response to the discussion paper of the empowered committee, the finance ministry held that alcohol and petroleum products should be included in the list of taxable items in the GST regime as against the states' proposal of excluding them. It also recommended a uniform threshold of Rs 10 lakh annual turnover for goods and services for both state GST and Central GST. However, it said the threshold exemption should not apply to dealers and service providers who undertake inter-state supplies.

The states had argued for a higher threshold of Rs 10 lakh for state GST while the threshold for Central GST was proposed at Rs 1.5 crore. Arguing in favour of a single rate duty structure, a finance ministry note said the dual rate would pose problems such as likelihood of inversions in duty structure with raw materials and intermediates being at a higher rate and finished goods being at a lower rate, especially as the intention is to apply the lower rate to necessities.

It said the inversion would result in input credit accumulation and demand for refunding the same from time to time.

The empowered committee had decided to adopt a two-rate structure -- a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. The proposal included a special rate for precious metals and a list of exempted items.

Around 99 items presently exempted under VAT may continue to remain exempted in GST regime, according to the Centre's response. "There should be no scope, with individual states, for expansion of this list even for goods of local importance," the finance ministry note said, adding that efforts would be made by the Centre to substantially reduce the number of items presently exempted under CENVAT regime and that there would be a common list of exemptions for Central GST and state GST.

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